In a shocking blog post last night, CEO Reed Hastings owned up to the mistakes behind its recent ill-received price hike. More importantly, Hastings revealed that Netflix will be splitting its operations into two distinct websites.

Netflix.com will remain the hub for the company's growing streaming catalog. However, Netflix will bump its original disc-renting business over to a new Qwikster.com domain.

The fallen tech darling's stock did open slightly higher this morning on the news, but this does seem to increase the risk profile of Netflix.

Sum of its partsThe decision to reposition its mail-order rentals under the whimsical Qwikster flag will inconvenience the 12 million subscribers who currently belong to both plans.

"A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated," Hastings concedes. "So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places. Similarly, if you rate or review a movie on Qwikster, it doesn't show up on Netflix, and vice-versa."

The lack of integration isn't just about tracking two different bills every month. Before, someone who added a flick into a queue knew whether it was available to stream, or if it was accessible only through a physical disc rental. Now that video fan will have to monitor two entirely different websites.

Personal movie ratings -- the grease in Netflix's recommendation engine that serves up great rental suggestions -- will now be merely half as brilliant. Relying on rental histories, which already is a pretty convoluted data-mining trough as families share accounts, will become even more scattershot.

Killing the disc softlyNetflix has its reasons for sending DVD and Blu-ray buffs to a site that sounds more like a convenience store in The Simpsons than a movie service.

The good news is that it will finally be able to free itself from the "flix" in Netflix. Just as DISH Network's (Nasdaq: DISH) Blockbuster and Coinstar's (Nasdaq: CSTR) Redbox offer video games as well as movies on disc, Qwikster will allow accounts to "upgrade" in order to also receive console titles.

I've asked Hastings about the lack of games for years. Sure, they may cost more at first -- and have shorter shelf lives -- but for a physical distribution model that is bogged down by paying for roundtrip shipping on every rental, there's something to be said about games that are held longer because they can't be played in the span of a matinee screening.

"We're focused on being a movie and TV show company -- entertainment video," he told me two years ago. "That's what our brand is about. We're not focused on games either on the physical rental or on the electronic distribution."

Well, now Netflix will have the freedom to take on GameFly, Redbox, Blockbuster, and any other disc-based gaming service.

Addition by subtractionThere are only 2.2 million disc-only Netflix subscribers, so it's easy to see why Netflix may be separating the two services. The last thing that it wants to remind its 9.8 million streaming and 12 million streaming and disc subscribers is that its digital catalog lacks the new releases and valuable classics that studios are holding back from Netflix's digital buffet.

As crummy an inconvenience as this will be for the folks on dual plans, it will also help fortify the platform that Netflix sees as the future. Netflix won't tell you that it values its streaming subscribers over its mail-based couch potatoes, but it's true. Why else would streaming get to keep the established brand? Why send disc-loading dinosaurs to a domain name that sounds more like a dating site for one-night trysts?

Netflix isn't planting two flags. It's really hunkering down on the streaming turf. This is where the tech giants are going. Amazon.com's (Nasdaq: AMZN) digital smorgasbord -- available at no additional cost to Prime subscribers -- now encompasses 8,000 titles. If Apple (Nasdaq: AAPL) does roll out actual televisions next year, as many continue to speculate, it'd be frankly crazy not to launch a Netflix-like subscription service.

Right now, the split is easy to cast as yet another disaster in a month that Netflix would rather forget. However, doesn't that also make this the ideal time to peel off its mask to reveal its true identity? Churn will go through the roof anyway. Hastings dolls are already burning in effigy. Breaking the old school and the new school into two different campuses will lead to a lot of headshaking now, but it's also the ticket for Netflix to begin moving to the head of the class in a year or two.

If you want to follow the plot twists in this saga as they occur, add Netflix to My Watchlist.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder and subscriber since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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So, they realize that charging more for DVD and streaming made 1 out of every 25 customers leave. It's good that they realize the problem. Their solution: make it MORE difficult for their remaining consumers while maintaining the same price? I don't get it at all.

I already dropped the by-mail DVD service, but if I had not, the added inconvenience of tracking two different websites would certainly push me over the edge.

Ham-handed management moves like this one support my feeling that competitors to Netflix's streaming service (mainly Amazon Prime streaming) can quickly encroach on Netflix's customer base--a base that Netflix itself seems intent on shrinking.

The problem with this is that the DVD rental filled out the streaming service. As a customer I would say that 90% of the content on the streaming service is B grade at best. I would get the DVD of the A list material and rip it into my video library at home, this way I could build up a bunch of movies I wanted to see in my iTunes library and not have to sit on the DVD if I did not feel like watching it right away (iTunes lets me stream it to my living room TV). Also the quality of the streaming isn't as tight as Netflix would want you to believe, About a third of the movies I play have to be restarted since the audio comes "off-track" or are the wrong episode. As an investor I have exited netflix at a double and am waiting to see what happens. As a user I have become more and more disenchanted with the service and am looking at other option as most of my peers are

It'll depend on the content, which they are giving no clues about. Maybe they'll sell Quikster to beef up the streaming content? Sort of leaves customers in the dark. I'm on both plans but I haven't been on Netflix long and have a lot of catching up to do with movies and TV shows. But eventually i'll run out of stuff to watch and ditch the Quikster.

I am a fan of Netflix. I think they are just getting a little adjustment to the extremely fast moving online world. They are and will continue to be innovative leaders. Don't let the "news" and "feelings" of others lead your investing.

That said, I will probably only have the streaming service now though... I don't even watch the DVD's fast enough at 2 per month lol.

This would be a perfect time for Apple to offer a "one more thing" moment, launching a video streaming service in conjunction with AppleTV. Or for Amazon to announce a huge licensing deal.

If that doesn't happen soon, the new Netflix could weather the storm and come out on top again. But they're awfully vulnerable in the near term - and their once fanatical customer base is more likely than ever to jump ship.

While the separation of queues will be a pain for those who retain both services, I think this is great. I haven't gotten a DVD by mail from Netflix in over a year. The last DVD I had I had out for 6 months and didn't even notice.

In order to score some of the streaming deals they need they're going to need boatloads of money. Getting rid of expenses for warehouse employees, mailings, brick-and-mortar warehouses, and physical DVDs will help them achieve this.

They will spin-off Quickster but, it won't be around in 3 years. DVD's will be a thing of the past within 5 years. People need to stop crying about this and move on. Start swimming Down Stream not Up Stream !

I have been a Netflix subscriber from the beginning and a shareholder for a couple years. I sold all my shares at the market open as NFLX is no longer the same company I originally invested in. I'm in the 1/2 of it's customers that subscribe to both streaming & mail. I may stay with DVD only to keep my queue & 1500+ reviews intact, but Redbox for quick DVD rentals is now more attractive. There's a Redbox 1 block from where I live. I loved Netflix so much that I had never even checked out Amazon's Prime streaming even though I was a member for free shipping. Today I will check that out and look at canceling Netflix streaming. If half of the subscribers like me do this, there goes another 6 million customers.Can Netflix survive this? I'm not sure. As was pointed out by someone, this drains their moat. It actually is encouraging their most loyal customers to move to the competition. There sure better be a vast improvement coming in the outdated streaming catalog if Netflix wants to stay in business. Sad day for customers and sadder for investors.

still doesn't change my argument that the DVD fills out the streaming and the streaming has large tech holes that need to be addressed. Compared to apple's service it is noticeably worse.

Added to that I would imagine most people do what I do for personal use, I have been working with digital media for 20 years and have never seen a crm that works, If you give people quality content that allows them to use it the way they want, then they will pay for it, if you don't then they will find a way to use it the way they want anyways and your business model will suffer. To believe anything else is to be a fool.

What they seem to forget is the benefit of their "recommendation" service. I found many movies based on that. Now, those recommendations will be silo'd depending on whether the movie was streaming or dvd, or will they just drop the recommendation altogether?

What a waste. Time to check out Red Box. And see if Blockbuster works around here.

I never understood why Netflix didn't add a PPV digital service along with streaming. That would make them competitive with the cable companies and RedBox for premium flicks in the first 30 days. It would also fill in the gaps now that DVD is separate.

And yes, while it would be an additional cost for their customers, many of us already buy PPV films through our cable provider or Amazon/Vudu/CinemaNow, etc. So why not capture some additional revenue by doing the same?

On the surface this seems like another blunder by Hastings as he had already alienated a portion of his subscriber base. People are fickle and generally are slow to accept change especially when it involves price increases and now making their life less convenient.

Objectively looking at this Mr. Hastings is right, the future lies in streaming as opposed to mail order DVDs. That being said I believe his decision was a bit premature as there are just not enough titles available on-line to satisfy most people. I like my Netflix Streaming service, but have been quite disappointed by the available titles.

Netflix is going to need to spend some cash and get some serious licensing agreements with the studios or I am not sure they will be able to compete successfully down the road. As a stockholder I still believe this company has the potential to be a powerhouse, but they better stop alienating their customers and start making some big deals soon.

The problem for NETFIX is they dont have any streaming titles that are worth watching. None of the new movies are available and some of the titles that I streamed in the past have dissappeared. If they are going to survive as a streaming only company they are going to need to get the new releases.

crankytexan - all we have in our house is Netflix, ITunes and rabbit ears. So basically all we watch is Netflix and even though 12000 titles sounds like a lot, a lot of it is really old titles that no one wants to watch. and what Snowden said is also true.

There is a ton of garbage on the Netflix menu. I did a search for Transformers, they didn't have it but they did have Transmorphers a movie that no one knew was made. You can also rent Mega-Shark. You can only watch every season of Madmen and Office so many times

A lot of people will bail. Two things: a) At a minimum, they should have had some sort of incentive plan to stick with them. b) The CEO, in issuing his "apology," just spoke more nonsense and used the wrong pronoun: it's all "we" and what "we" (i.e., Netflix) needs as a business. Nowhere in there is there anything about benefits to those other pronouns (the "you" customers).

I write proposals for a living, and the last thing you do is focus on the "we"--you always focus on the "you" and how "you" will benefit from changes. Mr. Hastings has a lot to learn about how to position a major change--and whom it benefits. The folks on the blog there were very quick to pick up on this disparity....d

crankytexan - I agree those are good titles but the problem is I have seen most of them. There was a reason the new titles shelf at blockbuster took up half the store, because people want to see new movies mostly.

I hope Netflix turns it around, I want to reinvest. Just too many bad decisions from the top and too many cracks in the service, I can't invest in companies/products that I don't enjoy using anymore, especially if there are options. (AT&T take note as soon as me and my iphone can leave you we will)

OK, let me see if I've got this right: they've just doubled my subscription costs, half the things I used to stream from Netflix are no longer available except as DVDs, and now I'm going to have to monitor two sites to figure out if they have what I want?

Thanks, Netflix, you just threw convenience out the window. I'm seriously considering cancelling my subscriptions. And I'm a shareholder. What's wrong with this picture (either streamed or on DVD)?

Streaming is the future but their streaming was a convenient complement to their DVDs because the streaming selection is very poor. I'm surprised to read there are so many more streaming subscribers. Paying for such poor selection makes no sense to me. I've downgraded to the one-disc plan and it remains to be seen how long I'll keep it. They gave me a reason to look elsewhere. And as a stockholder I'm especially disappointed.

Netflix made a huge mistake. I completely agree with the folks stating that what gave Netflix a true competitive advantage was having discs to fill out the streaming. There were synergies (as lame as that sounds). For many people (i.e., the half or so of the current customers with dual subscriptions), the services are presumably worth more together than apart. By explicitly separating the two services, Netflix is making it harder for people to take advantage of the benefits a dual subscription offered.

I've been a very happy customer of Netflix for 8 years. Currently paying for 3 DVDs (with Blu-Ray) and Streaming.

The price hikes are no big deal for me. I compare what I'm paying for the above (~$30/month) to cable!? Cable is 40% commercials AND you get to pay $80 to $100 a month for the privilege of watching those commercials.

What I am most concerned about with the Netflix change is the ratings and recommendations. That is one of the best parts of Netflix. That's why I am happy to stay, and pay my monthly fee. I have no desire to maintain ratings on two sites, and trying to keep track of what I've seen on both... Yuck.

Maybe IMDB lets rate movies and it provides recommendations. I don't know. But there's some opportunity for a 3rd party rating / recommendation engines that can be independent of where the movies come from...

Here's some of the most common arguments, and the reason why they should be questioned:

"AmazonPrime is going to overtake Netflix soon"

Wrong. Netflix has 12,000 titles and they keep adding to their library, almost double Amazon. Amazon's interface is not nearly as intuitive as Netflix. Furthermore, Netflix software is already preloaded on many DVD players & HDTVs, Amazon's is not. Amazon is $79/year, and you must pay the entire fee upfront, not to mention you pay extra for new releases.

---"Redbox is going to overtake Netflix"

Wrong. DVD's AND Blu-ray Discs will be obsolete in a few years. EVERYTHING will be streamed through wi-fi. Redbox can only be successful as long as people still own DVD players.

"I'm going to see what Blockbuster has to offer"

Blockbuster's online service is on demand. Their pricing plans for mailing DVD's are basically copied from Netflix. Netflix was streaming content years before Blockbuster and they do it the best. Even Apple is nowhere near offering a streaming catalog like Netflix

"Netflix doesn't have enough streaming content"

Wrong. Again, they stream 12,000 titles and they keeping adding to it with great shows like Mad Men, Frontline, Lost, The Office, Etc.

People like to complain about Netflix but it still has the biggest library and easiest streaming service to use. I expect them to keep growing.

The future is streaming and Netflix knows it. With DVDs Netflix is not at the mercy of content providers because it can buy DVDs on the open market. Unfortunately with streaming, Netflix is at the mercy of content providers. Will Netflix succeed at dealing with streaming content providers and dominate streaming even close to the same level they have dominated by mail DVD rentals? I don't know. And I'm don't believe other people when they say they do.

The future may be streaming but the competition there will be much fiercer than it's been on the DVD side. Netflix as a streaming only service does not have the quality of titles to dominate as it with both DVD and streaming.

I work in the entertainment industry and let me tell you, DVD is a long way from dead. The end of DVD is a broad statement without a lot of attention to the stats. We are at least 5 years away from losing DVD's. It's not happening in the next couple years as some posters seem to imply.

What I haven't heard anyone really address is what I think is the crux of the Netflix/Qwikster scenario--Netflix has deeply damaged their brand name, both by disrespecting their customers and by jettisoning them from the family. By changing the name of the service they have stated, "We no longer want you in the Netflix family. Go sit over there in the corner." I believe those DVD customers and the dual streaming/DVD customers (of which I am one) will be so disenchanted that when it comes to choosing a streaming service down the line, they won't choose Netflix.

I've worked in marketing for many years and a brand is a fragile and valuable commodity. Netflix executives clearly do not understand how to protect their brand with this latest move--the latest in a series of bad moves. I've got to wonder what has happened to Reed Hastings' business savvy. You don't repair a brand in a year or two. All this bad blood between them and their subscribers and the negative press will deeply damage the Netflix brand. I sold more of my shares today and as a subscriber I'm looking for other options. I signed up for Amazon Prime after the price hike announcement. They carry a lot of titles I can't stream on Netflix.

I believe the root of Netflix's seemingly strange behavior can be found in some disturbing red flags in their financial statements. They need to raise cash and fast, hence the price hike and splitting off of the DVD business, probably to sell.

This is a strange move. While Netflix is trying to segregate their customer base some of their competitors are consolidating. Case in point, the MSOs are bundling services (telephony, broadband access, cable tv, and now home security) and Netflix is looking to segregate........I really just find this bizarre.

I'm a marketing lead in my company. I focus on trying to understand what the customer wants, how to provide it, and do so profitably. The moves Netflix made over the past few months would not have been my path, but I guess that is why I am not an "Internet visionary."

I was long, long, long on NFLX until today. After a lot of reading, it seems the real reason for separating DVDs from streaming is that they can now get better terms from the content providers for streaming.

From Yahoo..."Bill Gurley believes that the Hollywood studios are now insisting that Netflix pay a per-subscriber-per-month licensing fee, whether or not its subscribers actually ever stream movies. This demand, Gurley reasons, may be forcing Netflix to pay per-month-fees on way more subscribers than it will ever recoup any value for (because many never use the streaming option)."

We'll see how that works out! Hollywood is now in control of NFLX's profit margins as other competitors ramp up.

The transition obviously needed to be made, but draining your DVD moat during a very vulnerable transition is just plain stupid. As jmkdiva notes, DVDs aren't going anywhere anytime soon. And you further piss off half of your most loyal subscribers - 12M now have to navigate two sites. The brilliance of the Netflix plan was the Netflix Prize algorithm that suggested films based on prior screenings. Now that will only be half-right since the two siloed websites won't even talk to each other.

My hunch is the streaming industry will evolve into several main streamers (and a gob of boutique streamers) that the public will go to, ironically like the first TV networks. I wouldn't be surprised if Netflix may have just blown being one of the big boys because they simply don't have the cash, their market cap has been halved and their loyal subscriber base will likely hemorrhage.

Why do I feel like I'm all alone in seeing this for what it is? Netflix is positioning Quikster (and all of its "DVD by-mail" customers in a tidy, easy-to-transfer database that is connected to a preloaded, recurring revenue stream) for sale. They had to segregate the two business models first, in a big, showy breakup so that they could jettison the fickle customers and establish a revenue baseline for the purposes of marketing the whole "by-mail" arm of the business. This is very similar to Verizon selling off its land lines and ISP business to Frontier. Right after that sale wrapped up, Verizon basically said it was because wireless was the way of the future.....which is exactly why the Netflix name is still attached to the streaming content and why the soon-to-be-obsolete business model of mailing media to people. On a related note, the US Postal Service is also crashing into the side of the mountain....and I assure you Quikster will NOT be able to afford to UPS every movie and video game to its customers, so perhaps Netflix has seen the writing on the wall for a while and they are positioning themselves to be a long-term player more-so than people are giving them credit for.

2 there are good titles in its streaming catalog but most of it is filler. I would like to know how much of the starz content was streamed compared to the other content and even though the starz content made up for a small portion of the streaming catalogue I would assume that it made up a majority of the streaming.

3. More and more when there is something I want to watch Netflix is experiencing technical difficulties and can not deliver.

4. I keep my subscription because netflix is still useful, I sold all my stock cause it is not a good investment. I will probably change to amazon streaming as soon as it is on my iTV. There are a lot of companies I use that I don't invest in sorry you can tell the difference. I shop at Safeway when I have to, doesn't mean I think it is a good investment. On the other hand I have owned at least 20 apple computers and other products in my life and they have been nothing but a joy to use and I also own a ton of apple stock based on that real world experience of using their products for work home and everything else,

5. My real world experience will Netflix has gone sour, the increasing technical difficulties I track in my own usage and on twitter combined with bad execution by management. Even if streaming is the future I don't think Netflix could have handled this shift any worse. I loved Netflix when I signed up for it, cut my cable. It is a still a deal compared to cable, but there is going to be a better deal coming soon.

6. Netflix down another 8% today. Trade by real world experience not market theories.

I got a question for you or anyone else here. reading over the stories about netflix the one thing that caught my eye was that Reed Hastings was added to the board of facebook earlier this year. Does anyone think this streaming split has anything to do with a netflix integration into facebook? What if you could recommend a movie to a friend and they could sign up right there through their FB account and watch it? I would post a movie I liked on my wall and if you wanted to watch it you could just enter you cc info and bingo have an instant netflix account if you didn't already have one. potentially 500 million more streaming users. what if the split isn't because they want to get rid of the DVD it is because they have to change the back end of the streaming part to fit better with FB?

One thing missing out of the whole debate is this. Netflix is not an ISP. Sooner or later, and I bet sooner, service providers will start charging for high volume users. Then Netflix will be in a pickle.

They own no content, they own no networks. They are now at the mercy of every one of their competitors, who do.

Everyone is looking so far down the road, they are missing the stuff in front of them. Are DVDs going away? Probably , but not for 4 or 5 years, and then maybe not.

I expect the shareholders to suffer worse than customers. I expect this stock to continue lossing value.

Nick1200 you seem to be making the same wrong assumption that Netflix did. There's no reason for people to not admit they stream if they do. I have done it on occasion also. But I would probably average 1 stream every 3 months. For people who like streaming then they don't see a problem. For people who feel they really don't have much interesting in the streaming content it's a problem. And there are a lot more people than you and Hastings want to see that are not interesting in their dusty boring streaming content. There is a reason why DVD's don't come out the same day a movie hits a box office. Because the box office wouldn't get as much money. There is a reason why Netflix can't get streaming content until it's been out on DVD for 3-6 months or more. Because those who didn't see it at the movies will likely get it on DVD if they want to see it. That was where Netflix had a moat it just blew up. Because the majority of people who went to the movies aren't going to go buy it or want to keep watching it on streaming after they saw it on DVD or at the movies. And, cable is not dead. Regardless of cable companies so called declining I only know 1 family who doesn't have some form of cable. So now Netflix is just becoming one of a very big crowd without very interesting content. Cable even gets movies that can't be streamed. There are so many other places to find more interesting content. Pay per view, Apple and Amazon. If you like watching old stuff over and over again well this is good for you. But I really don't think the majority of people have enough time so when they do get to watch stuff they want to see something new. Otherwise DVR's wouldn't be so popular. My DVR is much more valuable to me than anything Netflix has on streaming because it captures NEW content I haven't seen yet and don't want to miss.

I am a netflix subscriber I get both dvds and stream. I realize streaming is going to be the future, but it's a long way behind right now. Their isn't much content for streaming. The streaming service doesn't work all that great.

As a business plan you had a world class moat with the dvd bus. to an untried streaming model, taht is surrounded by some very major players. Apple is moving in, Amazon, I believe microsoft is coming with there xbox streaming/tv. As high as the walls they built up for the mail order dvds were its no longer the same thing.

Sending report...

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.
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